The Bank of Korea Foreign Exchange Operations Center "US Interest Rate Cuts to Begin in the First Half of Next Year"

US Policy Interest Rate Expected to Reach Mid-4% Range by End of Next Year

Jerome Powell, Fed Chair [Image source=AP Yonhap News]

There is a forecast that central banks in the United States and the Euro area will begin to cut policy interest rates in the first half of next year.

On the 27th, the Korea Development Bank's foreign exchange management division analyzed in the report titled "Global Economic Conditions and International Financial Market Outlook for Next Year" that as the cumulative effects of monetary policy tightening slow down the economy and inflation gradually declines, major countries will start lowering interest rates from the first half of next year.

By country, the U.S. Federal Reserve (Fed) is expected to maintain the current policy interest rate (5.25?5.5%) until the first quarter, taking time to assess whether the downward trend in inflation can reach the policy target level, and then begin cutting rates from the second quarter. Accordingly, the U.S. policy interest rate is expected to reach the mid-4% range by the end of next year.

The Fed is expected to maintain quantitative tightening (QT) at the current level throughout next year. However, if economic activity weakens as rate cuts are fully implemented, it is also highly likely that QT will be halted within the year.

The European Central Bank (ECB) is expected to start cutting policy interest rates (currently the deposit facility rate at 4.0%) from the second quarter next year in response to gradual declines in inflation and concerns over economic slowdown, with the year-end benchmark rate reaching the low 3% range.

The ECB is likely to gradually expand QT to normalize its balance sheet. The Pandemic Emergency Purchase Programme (PEPP) will reduce reinvestments before being discontinued, and the Targeted Longer-Term Refinancing Operations (TLTRO) are expected to be fully repaid before the end of 2024.

On the other hand, the People's Bank of China is expected to maintain an accommodative monetary policy next year to support economic recovery. Rather than actively easing monetary policy, it is anticipated to strengthen tailored support measures for vulnerable sectors such as the real estate sector and small and micro enterprises.

The Bank of Japan is expected to gradually normalize monetary policy next year. As inflation is expected to exceed the price target and wage growth remains high, the Bank of Japan is anticipated to abolish yield curve control (YCC) and raise the short-term policy interest rate, which is currently at -0.1%.

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